Market analysis a key to successful lease negotiations

March 30, 2009

My resume has never included "psychic" or "prophet," nor do I know of any in the real estate industry. However, as a commercial agent, my ability to foresee the future of a market is a skill that I have honed over the years and that has proved invaluable in assisting clients with lease negotiations.

Up until about 24-30 months ago, when commercial sale and lease prices were soaring to record levels in Southwest Florida, many landlords and tenants questioned whether to lock in rates for the long term before they escalated further. Those who negotiated the most satisfactory lease terms usually relied on the experience, insight and analytical abilities of a commercial real estate professional.

For an experienced commercial agent, projecting future market conditions is not a mysterious process, but actually a very logical one. By working with an agent who understands where the market may be going based on where it has been, both landlord and tenant can usually get what they want from lease agreements and extensions.

Different Perspectives

Before negotiating or renegotiating a lease, a commercial advisor should be able to give his client a clear picture of local supply and demand, as well as the market drivers that affect them.

For example, let's say that a local university's engineering school is about to receive its highly anticipated accreditation. Due to the community's growing demand for engineers and the school's ongoing efforts to attract engineering students, it stands to reason that accreditation will boost the school's enrollment. In turn, this is sure to prompt the need for additional student housing.

If there are barriers to getting this new housing out of the ground, it's reasonable to assume that the cost of housing (i.e. rents) will rise due to the short supply and high demand. Therefore, if I own existing student housing and I suspect that the supply side will soon be constrained, I'm not going to want to sign long-term leases with existing tenants.

Things might be different if I owned another kind of product in another part of town. Let's use retail space in Cape Coral for example. As economic development efforts begin to attract new businesses to the Cape, it's likely that those businesses will bring with them more jobs and new residents. Consequently, there will be a need for new grocery stores, dry cleaners, restaurants, real estate offices and other support businesses.

As a retail owner, would it be better for you to: (a) lock in your current tenants for the long term; or (b) wait until new tenants and developments start appearing to see what the market will bear? It really depends.

For instance, I know that in Cape Coral's Downtown CRA District, the supply side is constrained and the short- to mid-range prospects for new development are limited. So if I owned retail space there, I'd be willing to bet that rents will rise sooner than later. Because of that, it's unlikely I'd agree to negotiate with tenants seeking a long-term lease (five years or more).

My attitude would be different, however, if I owned retail space in an area that had lots of new product coming out of the ground and additional space on the way in the next 12-24 months. As a landlord in that scenario, I'd do whatever it takes to lease my available square footage on a long-term basis - before the glut of new space comes on the market and ultimately, causes rents to fall.

Opportunities & Exceptions

The same market conditions that prompt landlords to push for long-term lease agreements elicit the opposite response from tenants. Their goal is to take advantage of the increased opportunities and declining rents that accompany excess inventory. With the current uncertainties in our local market, most tenants have no reason to lock in today's rates for the long term.

Gauging Market Trends

Just as it's almost impossible to recognize when a market has bottomed out, it's fairly easy to misjudge or completely ignore windows of opportunity. This often happens to landlords and tenants who are so focused on their own best interests that they fail to see the bigger financial picture.

Professional commercial agents, on the other hand, tend to see your options more objectively. Because they work with owners and tenants in the field every day, they are experts at assessing supply and demand. As a result, they can distinguish trends in the individual submarkets from the more gradual movements of the overall market. Such insight is invaluable in times of transition.

Gary Tasman is executive director of Cushman & Wakefield's Southwest Florida office. For more information, please contact him at (239) 489-3600 or gary.tasman@cushwake.com